The problem, which Singer has pointed out before, is that big,
systemically important banks with trillions of dollars in assets
are trading these derivatives right along with him. However,
those banks don't actually know their value. The entire market is
opaque.

“We can only assume that the reason the global financial system
is still… over leveraged, opaque, reliant upon the implicit and
explicit support of governments for its very existence… is that
fixing the problem would be too painful for powerful special
interest groups,” Singer wrote in prepared remarks obtained
by ValueWalk.

He continues: “The major financial institutions (those bailed out
or implicitly supported in the last crisis) have taken important
steps to reduce their trading risks since the 2008 collapse.
However, it is impossible to verify such progress from public
financial statements or even to assess these institutions’ true
financial risks.”

Now here's the thing: We saw a little bit of this pay out last
week when Wall Street reported its Q4 2013 earnings. JP Morgan
serves as the perfect example.

JPM's investment bank reported a $1.5 billion loss because it
started using a different way to value its over the counter
derivatives — in finance jargon, this is called a funding
valuation adjustment (FVA).

Of all the major banks that reported, only JP Morgan took steps
to change the way it reports the derivatives it's trading/holding
on its balance sheet.

What the FVA is supposed to do is force banks to report what it's
costing them to hold the derivatives on their balance sheet — the
derivatives' funding cost.

What makes this possible, is that regulators have been working to
force the value of obscure derivatives into light. If we got into
that conversation, you'd fall asleep. But it's happening.

The point is that banks can now use this value data to better
understand what is going on in derivatives markets. And
apparently what's going on blows $1.5 billion holes in bank
balance sheets.

To Singer, though, none of this is enough. We need more clarity
about what people are trading, and more importantly, we need
systemically important institutions to post adequate collateral
("margin", in finance jargon) for the risks their taking.

“What I think about derivatives is if every institution that owns
or trades them is properly margined and marked to market,
including end-users, including every institution, including
sovereigns and multilateral institutions, then the system would
be safe – if people were margined the way customers of investment
banks are margined," said Singer. "It’s not a capital issue.
Capital is kind of a banking concept. But it’s margin. Margin is
a customer concept. Because of customer margins, margin-account
customers don’t typically cause the world to collapse.”